Manager commentary - December 31, 2018

The Fund invests substantially all of its assets in units of IA Clarington Strategic Equity Income Fund (“the Reference Fund”). Its performance therefore largely reflects the performance of that fund. All reference made to “the Fund” hereinafter reflects a discussion of the portfolio holdings and characteristics of the Reference Fund.

As we look back at 2018, we see a mix of good, bad and ugly. The good was accelerating economic growth in the U.S. that drove earnings growth to levels we haven’t witnessed in many years. That growth led to higher market returns for most of the year, while consumer and sentiment levels remained relatively high. The bad came at the beginning of the year and was likely a precursor of things to come, as interest rates increased quickly to levels that had some believing that risk-free rates were close to becoming stiff competition for the equity markets. Equity markets and interest-rate-sensitive fixed income struggled during this period before giving way to better returns as the year progressed. The ugly occurred in the last couple of months of the year as fears of an economic downturn, combined with global trade disputes and a non-accommodating central bank in the U.S., led to one of the worst-performing months of December in many decades.

Although the Fund faired relatively well during the year, we gave up some of our annual gains in December when speculation seemed to have overtaken facts. While we concede that earnings growth and economic growth in the North American markets will likely decelerate during the next 12 months, we see very little evidence of a pending recession and expect earnings growth, while lower, to remain positive, which historically has been associated with higher market returns. Based on these assumptions, we expect equity market returns to rebound as 2019 progresses and credit spreads for less interest-rate-sensitive fixed income to decrease as positive momentum is factored into investment analyses. Other potential catalysts include a thaw in trade war disputes as well as a U.S. Federal Reserve that will likely keep overall liquidity in the system relatively high by not raising short-term rates too aggressively.

The Fund outperformed its benchmark during the quarter and year due to overall defensive positioning, which included high relative cash levels and a larger exposure to defensive stocks. We generally avoided one of the worst-performing sectors with a low relative exposure to energy while having a higher exposure to Canadian telecommunications and U.S. health care securities, two of the better-performing sectors during the quarter. We increased our defensive positioning and our cash levels during the past quarter while decreasing the Fund’s exposure to the U.S. equity markets. We finished the quarter with higher cash levels than at the beginning of the period while reducing our overall equity exposure during the volatile fourth quarter.

The Fund’s top two contributors to performance during the past three months were holdings in Merck & Co. Inc. and Metro Inc. Merck has enjoyed the benefits of improving growth in its main business lines and an attractive relative valuation over the past year. We remain positive on Merck’s investment prospects as the year continues. Metro’s stock price has benefited from its defensive nature during a volatile period in the markets as well as improving results following its prior acquisition of Jean Coutu Group Inc. The largest detractor from performance came from an exposure to Superior Plus Corp. Superior’s negative price sentiment during the period was primarily related to an industry deceleration in chemicals pricing that weighed on the company’s near-term prospects.

Fund and benchmark performance as at December 31, 20181 year3 years 5 yearsPerformance start date
(Nov. 2013)
IA Clarington Strategic Equity Income Class - Series A-4.9%3.7%3.6%4.1%
S&P/TSX Composite Index-8.9%6.4%4.1%4.4%

Learn more about IA Clarington Strategic Equity Income Class

The performance data comparison presented is intended to illustrate the historical performance of the IA Clarington Strategic Equity Income Class as compared with historical performance of widely quoted market indices. As this fund invests substantially in its Reference Fund (IA Clarington Strategic Equity Income Fund), the differences discussed are those of the Reference Fund. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The S&P/TSX Composite Index is the premier indicator of market activity for Canadian equity markets, with 95% coverage of Canadian-based, TSX-listed companies. The index includes common stock and income trust units and is designed to offer the representation of a broad benchmark index while maintaining the liquidity characteristics of narrower indices. The Fund’s invests in dividend paying stocks while the benchmark is comprised of companies which may not necessarily pay a dividend. The Fund may have exposure to equities domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities domiciled in Canada. The Fund may have currency risk exposure while the benchmark has none. The Fund may hold cash while the benchmark does not. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance. Effective October 3, 2013, the investment objective and strategies of the Fund were changed and IA Clarington Investments Inc. was appointed sub-advisor to the Fund.